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Gamma Squeeze

A gamma squeeze occurs when rapid price increases in a stock force options market makers to buy more of the underlying stock to hedge their positions, further driving up the stock price. This feedback loop is triggered when many call options are bought, increasing the market makers’ need to hedge by purchasing the underlying shares. Gamma squeezes can lead to extreme price movements in a short time, often seen in highly speculative stocks.

Example

In early 2021, GameStop (GME) experienced a gamma squeeze as retail investors bought large volumes of call options. Market makers had to buy shares to hedge their positions, leading to a sharp spike in the stock price.

Key points

• Occurs when options market makers buy stocks to hedge against rising call options.

• Creates a feedback loop, accelerating price increases.

• Often seen in speculative or heavily shorted stocks.

Quick Answers to Curious Questions

A gamma squeeze is triggered by heavy buying of call options, which forces market makers to buy the underlying stock to hedge their exposure.

Investors should be cautious of extreme volatility and avoid overleveraging, as gamma squeezes can lead to rapid, unpredictable price changes.

Gamma squeezes can lead to increased volatility, potential market distortions, and significant losses for short sellers caught in the upward price movement.